Introduction of Independent Directors Databank

Pursuant to the notification of the Ministry of Corporate Affairs (“MCA“) dated October 22, 2019, an online data bank for the independent directors (“Data Bank“) has been incorporated by the Indian Institute of Corporate Affairs (“IICA“).It is an initiative by MCA for the capacity building of the existing Independent Directors, in order to inculcate the high standards of corporate governance in India. The Data Bank is a key instrument to enable Independent Directors to become “Agents of Change” on the corporate boards. This is a new check the box prerequisite for being employed as an Independent Director on the board of company in India.

 ‘Independent Directors’ means directors who apart from receiving director’s remuneration, do not have any other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries. Amongst all the directors, Independent Directors are considered to bring credibility to the board as they are outside the sphere of influence. However, recent corporate scams have turned the heat on company’s Independent Directors, who, the government feels, have failed to detect any signs of distress. The accountability on the Independent Directors became the main reason for many Independent Directors to resign, leading to a total of approximately 606 Independent Directors resigning from the National Stock Exchange – listed company boards in 2018.

In order to curtail the above scenario and to improve corporate literacy by making the Independent Directors aware of their duties, roles and responsibilities towards the company and its stakeholders, MCA has introduced an online proficiency self-assessment test which will be conducted by IICA within a period of one year from the date of inclusion of name in the Data Bank, failing which, his/her name shall stand removed from the Data Bank.

The Data Bank has been developed in accordance with the provisions of the Companies Act 2013 as mentioned below:

• Section 150 of the Companies Act, 2013 provides that “an independent director can be selected from a Data Bank maintained by any-body, institute or association, as may be notified by the Central Government. The Data Bank would contain names, addresses and qualifications of persons who are eligible and willing to act as independent directors. The company needs to ensure exercise of due diligence before selecting an independent director from the Data Bank”.
• On 22nd October 2019, MCA notified the Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019 and amended the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019.
• The Companies (Creation and Maintenance of Databank of Independent Directors) Rules, 2019 effective from 1st December, 2019 authorised IICA to act as the institute or association, responsible for the creation and maintenance of the online Data Bank containing names, addresses and qualifications of existing Independent Directors and persons who are eligible and willing to act as Independent Directors. In furtherance, IICA was also entrusted with the duty to conduct an online proficiency self-assessment test of the Independent Directors, which would be available from 01st March 2020.

Salient Features of Databank:

1. Empanelment of professionals acting as Independent Directors;
2. Empanelment of professionals with/without DIN who wish to serve as Independent Directors;
3. Online courses offered through an integrated Learning Management System (LMS)
   • Board essential course
   • Board practice courses
4. Newsletter and knowledge resources for continued professional development;

Steps for Registration

• An individual whether having valid Director Identification Number (“DIN“) or not, needs to create a user account on MCA portal (WWW.MCA.GOV.IN) and verify the DIN/Permanent Account Number (“PAN“)/Passport and once the verification is completed, MCA portal re-directs the application to IICA portal.
• The applicant will then receive login credentials to his/her registered email and mobile number using which, the applicant needs to login to IICA portal and fill all his personal details, the information relating to educational and professional qualifications etc.
• On successful filling of information and giving necessary declarations, the applicant has to select the privacy options and pay the fee (basis the subscription plan) to complete the registration process.
• Once the registration process is completed, the applicant will receive a registration certificate from IICA capturing the details of name of the applicant, registration number and validity of the registration.

Key Objectives:

• Empanelment of existing Independent Directors as well as the professionals aspiring to become independent directors;
• Build capacities of Individuals by delivering eLearning courses on topics related to corporate governance, regulatory framework, financial prudence, and other important aspects;
• Provide a platform to individuals to help them acquire knowledge, develop new skills, assess their understanding, and apply best practices;
• Create an eco-system of individuals looking for opportunities and corporates requiring to appoint Independent Directors.

The Data Bank is a comprehensive source of both existing Independent Directors as well as individuals eligible and willing to be appointed as Independent Directors. All Independent directors are required to register themselves with the Data Bank within a period of 7 months effective from 1st December, 2019. However, the last date of registration for Independent Directors was further extended up to 30th June, 2020.

Companies which are required or desire to appoint Independent Directors and seek the information of Independent Directors can also register themselves with the Data Bank using their Corporate Identity Number (CIN) and by following the registration process.

This Data Bank contains names, addresses, and qualifications of persons who are eligible and willing to act as Independent Directors. Data Bank of Independent Directors aims to provide single-point access to the companies to search Independent Directors as per their needs and criteria.

Compliances required to be monitored by an eligible or desirous candidate to be appointed as an Independent Director:

1. Every individual who has been appointed as an Independent Director in a company, on the date of commencement of this rule, shall, within a period of three months from such commencement or who intends to be appointed as an Independent Director in a company, after such commencement, shall, before such appointment apply online to IICA for inclusion of his name in the Data Bank for a period of one year or five year or for his lifetime.
2. Every individual whose name has been included in the Data Bank shall file for the renewal for a further period of one year or five year or for his lifetime within thirty days from the date of expiry, failing which the name of such individual shall stand removed from the Data Bank of the IICA.
3. Every individual whose name is included in Data Bank shall pass an online proficiency self-assessment test conducted by the institute within a period of one year from the inclusion of name, failing which name shall stand removed from Data Bank.

4.Every individual whose name is entered in the Data Bank shall within 1 (one) year from the date of inclusion of his/her name in the Data Bank shall appear for an online proficiency self-assessment test and secure at least in aggregate 60 (sixty) per cent of the marks and failing which, his/her name shall stand removed from the Data Bank of IICA. There’s no bar on how many times the test can be taken.

5. Pursuant to provisions of Rule 6(3) of the Companies (Appointment and Qualification of Directors) Rules, 2014, every Independent Director is now required to declare that their names are included in the Data Bank each time the independency declaration is submitted under section 149(7) of Companies Act, 2013. Further, the company has to declare annually in its boards’ report that the Independent Directors appointed on the Board have cleared online proficiency self-assessment test conducted by IICA, unless they are otherwise exempted from same.
6. An individual who has served a period of not less than 10 years either as director or key managerial personnel in a listed public company or in an unlisted public company having paid-up share capital of INR 10 crore or more shall not be required to pass online proficiency self-assessment test. However, he/she will still be required to get his/her name included in the Data Bank.

Conclusion

The corporate industry is alienated in their views on this development. One part is of the view that the online Data Bank will improve the knowledge and functioning of the Independent Directors and create a larger pool of capable individuals who could act as Independent Directors and also will act as a tool to set high standards of corporate governance. The other part is of the view that the process of creating Data Bank and online proficiency test may in fact further decline the number of Independent Directors available as on date and is not a sustainable step. However, in my view the said step can prove to be very beneficial for the working of the companies and hope that it comes out as a progressive step that will enhance the corporate governance standards across the boards of companies in India.